Wall Street strategists predict weak bull market

It is the first Monday of the New Year and we have already reviewed 2013's winners and losers. Now it is time to look forward. What do the experts think will happen in 2014 and should we even care.

Perhaps you are familiar with Philip Telock's landmark UC Berkeley study that looked at 82,000 predictions over 25 years by 300 leading economists. It turned out that their so called expert views were no better than random guesses, and worse, the more famous, the less accurate the prediction.

Last year was a good example of Telock's study as Wall Street strategists weren't even close to bullish enough. Goldman Sachs' chief strategist David Kostin had a price target of 1575 and Morgan Stanley's Adam Parker was predicting a flat year at 1434. The consensus was for low teens price appreciation in the S&P 500. So after a big two month run, all the strategists raised their price targets by mid-March. Not a very good showing to say the least.

Predictions for 2014

After looking at all the Wall Street reports, I compiled the predictions from 14 top stock market strategists. For 2014, the average price target for the S&P 500 is 1955 or a 5.7% return. For EPS, the average call is $117.21.

Strategist

Firm

S&P 500 target

upside

S&P EPS

David Bianco

Deutsche Bank

1850

0.1%

119

Brian Belski

BMO

1900

2.8%

116

Barry Knapp

Barclays

1900

2.8%

119

David Kostin

Goldman Sachs

1900

2.8%

116

Michael Kurtz

Nomura

1925

4.1%

112.5

Sean Darby

Jefferies

1950

5.5%

121

Jonathan Golub

RBC

1950

5.5%

119

Julian Emanuel

UBS

1950

5.5%

116

Andrew Garthwaite

Credit Suisse

1960

6.0%

115.9

Tobias Levkovich

Citigroup

1975

6.9%

117.5

Savita Subramanian

Bank of America

2000

8.2%

118

Adam Parker

Morgan Stanley

2014

9.0%

116

John Stoltzfus

Oppenheimer

2014

9.0%

115

Tom Lee

JP Morgan

2075

12.3%

120

average

1955

5.7%

117.21

The Outliers

While we could summarize each strategist's view, we will take a quick look at the two outliers of the group.

First there is Deutsche Bank's David Bianco who has had a reputation for being one of Wall Street's biggest bulls. In 2011 when stocks were tumbling and economic data were deteriorting, Bianco made a great call by cranking up his price target on the S&P to 1450 and his bullish call was spot on.

However this year his price target is 1850 or just 0.1% return from last year's close. This is a target that he set in June of 2013 but he is reiterating his call in the New Year.

In June, we introduced 2014 & 2015 yearend S&P targets of 1850 and 2000. We argued the S&P PE would climb to its normal trailing PE of 16x (<15x then) as healthy EPS growth continued within a long lasting expansionary cycle of moderate growth. We also argued that if real long-term risk free interest rates stayed below historical norms when QE stopped, then a PE over 16x trailing EPS would be fair. The PE is back to normal, a bit earlier than expected, but the Fed has yet to taper. Thus, we think it prudent not to assume any further PE upside until we get more clarity on where 10yr yields likely settle post QE.

The most bullish strategist on the street is JP Morgan's Tom Lee who set his year end target at 2075 or +12.3%. He is the only strategist predicting double-digit price appreciation for the S&P.

For several years now we have advanced the idea that the current bull market could prove to be one of the longest in history. However, what we believe many investors have yet to fully appreciate is how this market is indeed behaving like a classic bull market...we believe this is a classic bull market and the 6th year is typically strong. Historically, bull markets lasting at least 4 years (since 1897) have only ended with a recession—that is, they typically do not end just because "everyone is too bullish."

But Lee sounded even more bullish in a recent appearance on CNBC. He believes that "there's a one-in-three-chance we're up 30% [in 2014]."

What do you think will happen in 2014? Are you a bull or a bear for the New Year?

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